Sri Lanka's exports were contracting due to lower external demand from Europe, lower commodity prices, while imports were falling due to tightening measures taken by authorities the monetary authority said. A trade contraction points to an economic slowdown.

Agricultural exports fell 11.8 percent to 192.3 million US dollars with tea exports falling 12.6 percent to 112.8 million US dollars.

Apparel exports fell 14.4 percent to 328.2 million US dollars and rubber exports also fell 14.4 percent to 69.1 million dollars.

Consumer goods imports fell 20.9 percent to 237.4 million US dollars. Intermediate goods fell 27.4 percent to 780.8 million US dollars with petroleum falling 53 percent to 211.1 million US dollars.

Investment goods fell 20.6 percent to 308.4 million US dollars.

Sri Lanka's trade deficit in July contracted 33.8 percent to 534.6 million US dollars.

In 2011 Sri Lanka's imports went to unsustainable levels due to credit taken to manipulate energy prices and large volumes of money printed by the Central Bank to manipulate interest rates.

Energy prices were raised in February and interest rates were raised ending money printing gradually, though the rupee fell from 110 to 134 in the process.

In the absence of any central bank money injections to the banking system to fire fresh credit, imports will be limited to the net inflows from exports, remittances, tourism receipts net borrowings and investment inflows.

The trade gas is caused by earnings or borrowings flowing in to an economy outside the merchandise exports.

If bank credit slows or turns negative a country can run a so-called 'balance of payments surplus' when the central bank withdraws liquidity from the banking system, allowing foreign reserves to be locked up.

Updated